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Canadian Wildcatters Win Big On Alberta’s Oil Cuts

The last year or so has not been kind to Canadian oil producers. Output has been rising as international prices stabilized at higher levels, but pipeline capacity has not changed, which last year pushed Canadian heavy crude to huge discounts, hitting producers hard. Now prices are higher but many are still struggling to make ends meet. Outside the oil sands, however, things look differently.

Bloomberg’s Robert Tuttle quoted in a recent story Michael Kay, a senior industry analyst from Bloomberg Intelligence, as saying “Anything outside the oil sands, those guys are definitely happy with where prices are versus where they were.”

Canada’s non-oil sands producers are certainly in a better position: they produce lighter crude, whose price is currently just about US$4 a barrel below West Texas Intermediate. They sell their output locally and are therefore unconcerned about the pipeline shortage that seems likely to remain in place for the observable future. The local sales also mean they don’t have to worry about costly rail transport, either. In short, as Tuttle puts it, Canadian wildcatters “are getting a big price boost from the curtailments announced at the start of December, without the headaches.”

The joy is not universal, however. Last November, Bloomberg again wrote about Canada’s light oil producers noting that they, too, were hit by the discount of the local benchmark to WTI, which at one point reached US$50 a barrel.

At the time, the news outlet quoted the chief executive of one such light crude producer, Whitecap Resources, as saying the industry was heading into unchartered territory this year with wild swings in prices. Grant Fagerheim at the time added that some producers were already cutting their production as they couldn’t get their oil to U.S. refiners. In other words, some light crude producers have been spared this particular headache, but those that export their crude have not.

The situation is pretty similar for oil sands producers, too. The pipeline and railway transport woes are far from universal. In fact, integrated oil producers such as Suncor have been doing pretty well both when Western Canadian Select prices were low and now when they’re a lot higher. Low crude prices mean cheap feedstock for refineries and high crude prices mean higher realized prices for the commodity that Suncor exports.

Some light oil producers are already adjusting their drilling plans to expand production in a bid to take advantage of the price situation. They anticipate substantial cash flow improvements this year as a result, while oil sands producers are being more guarded in their expectations.

The picture is mixed, as usual. Canadian oil prices will remain volatile with surprises always a possibility. The latest came from the Alberta Energy Regulator. It said crude oil inventories in the province had jumped by 3.9 million barrels despite the production cuts. The reason? A combination of more expensive oil and costly rail transport. The only support Alberta’s heavy crude producers can expect now is from a market with shrinking supply of heavy crude coupled with healthy demand. Light crude producers, meanwhile, are switching to a “Drill, baby, drill” mode.